Not Your Father's Retirement Strategy, but Better

NEW YORK ( TheStreet) -- "The times, they are a-changin'," Bob Dylan once warbled. Although unlikely, Dylan could very well have been referring to changes in market conditions that should prompt a new look at traditional retirement savings investment strategies. To savvy investors tired of languishing returns of late, perhaps his lyrics could serve to underscore the market's message: move over, buy-and-hold investors; there is a new sheriff in town, and he is 401(k) daytrading.

Conventional wisdom once suggested holding stocks for the long term. After all, the broad stock market rewarded buy-and-hold investors with generous returns in the range of 11% per year on average from 1926 through 2000. It seems investors got used to the powerful engine of economic growth driving outsized market returns over the long term.

Flash forward to today. Long gone are the 1980s and 1990s when upside reward ultimately overwhelmed any downside risk of investing in stocks. Now, bumbling along through a "Lost Decade" and beyond to the present day, the broad U.S. stock market as measured by the S&P 500 index is again revisiting levels first reached some 13 years ago.

Changing on a daily basis that may defy logic at times, the broad U.S. stock market has dramatically flitted twice between some heady exuberance and near despair, all to end up about where it started the new millennium. This new era of market volatility that has somehow managed to balance its gains and losses has sharply reminded investors of the potential downside risk that accompanies the upside reward traditionally offered by stock ownership.

Remember too the day when Mom was busy at home raising the kids, while Dad worked one 9-to-5 job during his entire career until he retired with a good old-fashion pension and Social Security. Then pensions began to wane as 401(k) plans came into favor, and the continued long-term viability of Social Security in its current form came into question.

Now both moms and dads work all kinds of hours to raise a family, all the while left with the task of managing serial retirement savings accounts from their employment venture(s), in the hopes of some day being able to retire with enough to make ends meet from their 401(k)s, personal savings and maybe even some Social Security.

Left on their own with this increased personal responsibility of managing retirement savings to last a lifetime or two in the midst of a changing investment climate, individual investors need a new way to take advantage of daily market volatility.

Now enters a simple, but carefully crafted, approach that relies on daily transfers between cash and stock funds to convert the market's ups and downs into lasting gains within retirement savings. Much safer than it sounds, 401(k) daytrading essentially amounts to buying low and selling high within retirement savings accounts, where trades do not trigger immediate income taxes or direct trading costs.

With retirement savings account fund options typically valued once a day at the market close, 401(k) day trading calls for the execution of an incremental fund exchange between cash and stock market index funds each day just prior to the market close. Each daily fund exchange depends on the direction and amount of the stock market's change for the day.

Taking only minutes a day, each incremental fund exchange amounts to either setting up a gain through an exchange from cash to stock when the market is about to close lower or capturing a gain through an exchange from stock to cash when the market is about to close higher.

Done the right way to satisfy funds' frequent trading rules, 401(k) daytrading makes something out of a market that has offered nothing more than volatility over the past 13 years.

In fact, over the 10 years ended March 31, a 401(k) daytrading strategy netted a return of 42.5%, almost 20% better than holding the S&P 500 (excluding dividends). That being the case, 401(k) daytrading adapts well to "the times, they are a-changin'."

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Schmitt is an actuary and author of 401(k) Day Trading: The Art of Cashing in on a Shaky Market in Minutes a Day.

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